Chapter 4.1 – What is demand?
- Demand – combination of desire, ability and willingness to buy a product
- Microeconomics – part of economics that studies small units, such as individuals and firms
An introduction to Demand
- Market economy – economic system in which people and firms make all economic decisions
- Demand schedule – a table that lists how much of a product consumers will buy at all possible prices
- Demand has two variables: price and quantity
- Demand curve – a curve that shows the quantities demanded at all possible prices
The law of demand
- Law of demand – rule stating that consumers will buy more of a product at lower prices and less at higher prices (inverse relationship)
- Market demand curve – a curve that shows how much of a product all consumers will buy at all possible prices
Demand and marginal utility
- Marginal utility – additional satisfaction or usefulness a consumer gets from having one more unit of a product
- Utility – the pleasure, satisfaction, or benefit a person receives from consuming a product
- Diminishing marginal utility – decrease in satisfaction or usefulness from having one more unit of the same product
Chapter 4.2 – factors affecting demand
Change in the quantity
- Change in quantity demanded – movement along the demand curve showing that the amount someone is willing to purchase changes when the price changes
- Income effect – that part of a change in quantity demanded due to a change in the buyer’s real income when a price changes
- Substitution effect – that part of a change in quantity demanded due to a price change that makes other products more or less costly
Change in demand
- Change in demand – shift of the demand curve when people buy different amounts at every price
- Changes in consumer income can cause a change in demand
- Normal goods – direct relationship
- Inferior goods – inverse relationship
- Change in consumer tastes and preferences can cause a change in demand (direct)
- Substitutes – competing products that can be used in place of one another (direct)
- Complements – products that increase the use of other products (inverse)
- The way people think about the future can affect demand
- The market demand curve can also change if there is a change in the number of consumers (direct relationship)
Chapter 4.3 – elasticity of demand
- Elasticity – a measure of responsiveness that shows how one variable responds to a change in another variable
Demand elasticity
- Demand elasticity – a measure that shows how a change in quantity demanded responds to a change in price, determined by time, substitutes, income
- Elastic – type of elasticity where a change in price causes a relatively larger change in quantity demanded
- Inelastic – type of elasticity where a change in price causes a relatively smaller change in quantity demanded
- Unit elastic – type of elasticity where a change in price causes a proportional change in quantity demanded
| Type of demand | Elastic | Inelastic | Unit elastic |
| Change in price | Down | Down | Down |
| Change in expenditure | Up | Down | No change |
The total expenditures test
- Total expenditures = price (quantity demanded)
- If a business can determine a new product’s demand elasticity, it can find the price that will maximize total revenues
Determinants of demand elasticity (if yes: elastic, if no: inelastic)
- Can purchase be delayed?
- Are adequate substitutes available?
- Does purchase use a large portion of income?
Chapter 5.1 – what is supply?
- Supply – amount of a product offered for sale at all possible prices
- Law of supply – principle that more will be offered for sale at higher prices than at lower prices
An introduction to supply
- Supply schedule – a table showing how much a producer will supply at all possible prices
- Supply curve – a graph that shows the different amounts of a product supplied over a range of possible prices
- Market supply – a graph that shows the various amounts offered by all firms over a range of possible prices
- Quantity supplied – amount offered for sale at a given price
- Change in quantity supplied – change in amount offered for sale when the price changes
Change in supply
- Change in supply – situation where different amounts are offered for sale at all possible prices in the market; shift of the supply curve (direct relationship)
- A change in the cost of productive inputs such as land, labor, and capital can cause a change in supply
- Increase productivity, more output is produced at every price, which shifts the supply curve to the right
- New technology tends to shift the supply curve to the right.
- Taxes increase causes the supply curve to shift to the left
- Expectations about the future price of the product can also affect supply
- When the government establishes new regulations, the cost of production can change, causing a change in supply
- A change in the number of suppliers can cause the market supply curve to shift to the right or left
Elasticity of supply
- Supply elasticity – a measure of how the quantity supplied responds to a change in price
- Are resource inputs readily available?
- Are factors mobile – are workers prepared to move to where they are needed?
- Can finished products be easily stored, and are they existing stocks?
- How long and complex is the production cycle or production process?
- Time is the sole significant determinant of price elasticity of supply
- The three elasticities
| Type of elasticity | Change in quantity supplied due to a change in price |
| Elastic | More than proportional |
| Unit elastic | Proportional |
| Inelastic | Less than proportional |
Chapter 6.1 – prices as signals
- Price – monetary value of a product as established by supply and demand
- High prices signal buyers to buy less and producers to produce more, vice versa
Advantages of Prices
- Prices are neutral, they favor neither the producer nor the consumer
- Flexible
- Most people have known about prices all their lives
- Prices have no cost of administration
Prices as a system
- Not only help individuals make decisions; they also serve as signals that help allocate resources between markets
- Rebate – partial refund of a product’s original price
- Alternative to the price system – rationing – used in command like economy (problems below)
- Equity/fairness
- Administrative cost
- No incentives
- Inefficient/opaque
The price adjustment process
- Market economy are voluntary, compromise settles differences between buyers and sellers
- Economic model – a simplified version of a complex behavior expressed in the form of an equation, graph, or illustration
- Equilibrium price – price where quantity supplied equals quantity demanded
- Surplus – situation where quantity supplied is greater than quantity demanded at a given price
- Shortage – situation where quantity supplied is less than quantity demanded at a given price
Explaining and predicting prices
- Change in supply and or demand may occur based on situations
- These changes affect price
- Whenever supply or demand for a product fluctuates, the elasticity of the two curves affects the size of the price change
When markets talk
- Markets send signals in that they speak collectively for all the buyers and sellers who trade in the market
- Talk when prices move up or down significantly in reaction to events that take place elsewhere in the economy
